Major Market Indices for September 1:
Dow 30.16 9949.75
Nasd 13.75 1805.43
S&P 4.54 1133.57
Rus2K 0.50 468.56
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Today's Trading Plays
* Inter-Tel, Inc. (Nasdaq:INTL), $16.00 (BUY LONG)
Inter-Tel, Inc. is a single-point-of-contact, full-service provider
of digital business telephone systems, call-processing software, voice
-processing software, call-accounting software, Internet Protocol (IP)
telephony software, computer telephone integration (CTI) applications,
IP and traditional long distance calling and other communications
services. Inter-Tel's products and services include the AXXESS and
Eclipse2 digital business communication software platforms, with
integrated voice-processing and unified messaging systems, InterPrise
voice and data routers, ClearConnect Talk-to-Agent e-Commerce software
and IP telephony communications services. The Company also provides
maintenance, leasing and support services for its products. The
Company's principal products are digital telephone systems that support
networked installations up to 20,000 ports, IP telephony products and
services, CTI applications, unified messaging software and voice-
processing software.
Trading Strategy:
Stocks in the telecommunciations sector have sold off dramatically over
the past year. Indeed, the sector has seen valuation fall off sharply
as business dropped off dramatically in the past year or so. INTL,
however, has shown a great deal of relative strength since bottoming
in April at around $8.00/share. The stock has been in a steady uptrend
and recently has been trading sideways, even as the markets have gone
lower. One reason for this is the strong fundamentals that INTL maintained.
The company beat expecations in the second quarter and is currently
trading at about 14 times next year's projected earnings. From a
technical point of view, we'd like to see the stock break through
the $16.50 area. Even so, the volume on Friday was quite high, and I
think we'll be safe to take a position in the stock at the open on
Tuesday. I can't find a reason for the surge in volume, but where there
is volume, you can bet there is a story.
Buy Range: Buy at the open using a limit order set at $16.25. If the
stock opens lower, buy at the open.
Sell Stop: $15.30
Target: $18.00
Average Daily Volume: 151,000 shares.
Friday's Volume: 518,100 shares.
* MGI Pharma, Inc. (Nasdaq:MOGN), $11.90 (BUY LONG)
MGI Pharma, Inc. is an oncology-focused pharmaceutical company that
acquires, develops and commercializes proprietary pharmaceutical
products that meet patient needs. The Company markets four cancer-
related products in the United States. Salagen Tablets treats symptoms
of radiation-induced xerostomia, known as chronic dry mouth, in head
and neck cancer patients, and to rheumatologists as a treatment for
the xerostomia associated with the autoimmune disease Sjogren's
syndrome. The Company also sells Didronel I.V. Infusion, which is
approved for the treatment of elevated blood calcium in late-stage
cancer patients. The Company distributes Hexalen Capsules, a second-
line chemotherapy for ovarian cancer patients who are refractory, or
unresponsive, to existing cancer therapies. MGI also began direct
promotion of Hexalen Capsules and Mylocel Tablets, a treatment for
certain malignancies.
Trading Strategy:
MGI has been trading sideways in a rectangle pattern for about 3 1/2
months now. This sort of consolidation usually leads to a breakout,
either up or down from the rectangle. MOGN has moved back up to the
upper range of the rectangle and appears on the verge of a breakout
over $12.00. This is where we'll look to enter a position. I think the
stock will make a quick move up to about $14.00 or perhaps a bit higher,
once it breaks through $12.00. We'll look to buy at $12 and sell at $14.00
Buy range: Use a buy stop order to enter a position once the stock hits
$12.00. Avoid buying at lower levels.
Sell Stop: $11.20
Target: $14.00
Average Daily Volume: 111,500 shares
Friday's Volume: 77,700 shares
* Alliance Semiconductor (Nasdaq:ALSC), $10.15 (BUY LONG)
Alliance Semiconductor Corporation designs, develops and markets high
performance memory and memory intensive logic products to the personal
computer, networking, telecommunications, instrumentation and consumer
markets. Market trends, such an increased emphasis on high-throughput
applications, including networking, graphics, multimedia, computer,
consumer, and telecommunications products, have created opportunities
for high performance memory products. The Company addresses these
opportunities with its families of static random access memories
(SRAMs) and dynamic random access memories (DRAMs), characterized by
high storage capacity (density), fast access times and low power
consumption.
Trading Strategy:
I like ALSC at this level because its sitting just above strong support
at $10.00. Entering a trade in a stock like this is attractive because
it allows the trader to place a tight stop limiting our downside. The
upside potential here is substantial as the stock could easily make
a run at the $12.00 range, which has been resistance. $10 was the low
on the spike down in April, from which the stock rallied to highs above
$14.50. The stock revisited the $10.00 level in late July, again rallying
all the way up to over $12.50. On Friday, buyers once again stepped in
at $10.00 as the stock rose off that level on heavy volume. We'll set
the stop loss sell at $9.85. Our target will be $12.00, in the short term.
Buy Range: Buy at the open using a limit order buy at $10.25. If the
stock opens higher, wait for a pullback. If the stock opens lower,
we'll buy at the open.
Sell Stop: $9.85
Target: $12.00
Average Daily Volume: 243,000 shares
Friday's Volume: 362,400 shares.
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Update of Current Positions
MIEC (opened long on 8/14): MIEC was down again on Friday on very light
volume. The stock continues to find support at $8.00 and I've expecting
a breakout move up shortly. No reason to close the recommendation at
this point. No changes. Our stop loss sell remains at $7.70 and the
target remains at $9.15. HOLDING LONG
AOT (opened long on 8/23): AOT was down fractionally on Friday. No
changes. The stop loss sell remains at $23.50 and our target
remains at $27.50. HOLDING LONG
EAT (opened short on 8/24): EAT was up slightly on good volume on
Friday. I'm MOVING THE STOP LOSS BUY DOWN TO $27.00 TO PROTECT OUR
POSITION. Our target to the downside remains at $22.75. HOLDING SHORT.
VGIN (opened long on 8/27): VGIN was up over 1% on Friday. No changes.
Our stop loss sell remains at $23.75 and our target remains at $28.00.
HOLDING LONG
CRL (opened long on 8/27): CRL was down 1 cent on Friday. No changes.
Our stop loss sell remains at $35.25 and our target remains at $41.00.
HOLDING LONG.
CLS (opened short on 8/28): CLS rose to trigger out conservative stop
loss buy at $37.00. The stock closed lower on the day. Even so, its
a difficult trading market and its best to lock in profits when in doubt.
POSITION CLOSED FOR 10.8% GAIN.
OMM (opened long on 8/29): OMM was unchanged on the day. No changes.
Our stop loss sell remains at $4.95. Our target remains at $6.00.
HOLDING LONG.
EXAR (opened short on 8/29): EXAR was up fractionally on the day.
I'M MOVING THE STOP LOSS BUY DOWN TO $21.50 TO PROTECT OUR POSITION.
Our target remains at $17.00. HOLDING SHORT
FDS (opened short on 8/30): FDS was down fractionally on the day on
Friday. No changes. Our stop loss buy remains at $26.75 and our target
remains at $20.00. HOLDING SHORT
SFD (opened long on 8/31): SFD opened at $44.30 to fill our order
on Friday. The stock closed the day at $44.25. No change. Our stop
loss sell remains at $43.00 and our target remains at $49.00. HOLDING
LONG.
EXPE (opened short on 8/31): EXPE opened at $36.27 to fill our short
sale order. The stock closed at $37.36. No changes. Our stop loss
buy remains at $38.05 and our target remains at $28.00. HOLDING SHORT.
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Today's Trading Tidbit
Meet the Market Maker...
Internet stock bulletin boards are full of chatter about the actions
of the "MM's" or market makers. Market makers are blamed for sharp
selloffs, big run-ups or even sideways trading in a stock. It seems
everyone is willing to credit the market makers for every move a stock
makes, though few seem to actually understand who the "MM's" are and
what their role is.
To understand who the MM's are, you have to understand the difference
between stocks traded on the New York Stock Exchange, and the Nasdaq
markets. All stocks traded on the NYSE are traded through a person
called a "specialist". Each stock has only one specialist. All orders,
both buying and selling are routed through this one individual who
fills the orders either by buying and selling from his own inventory of
stock, or by matching buyers and sellers at specific prices.
The Nasdaq market, however, trades through the "market makers". Market
makers are required to offer stock for sale and to place a "bid" for
stock to buy at all times. This is called making a "two-sided" market.
Different firms trade through different MM's. Most of my orders at
Etrade (for example) are routed through Knight Securties or HERZOG, HEINE,
GEDULD. Many different market makers trade in stock on the Nasdaq. One
stock may have literally dozens of market makers trading in that stock.
Other thinly traded stocks may only have a few market makers trading in
that particular issue.
It is the actions of the market makers in these thinly traded stocks that
gets the most attention. In the late 90s there were several highly
publicized cases in which it was shown that market makers were collaborating
with each other to artificially move the prices of thinly traded stocks.
This activity is illegal and watched closely by the SEC. Still, any sharp
unexpected move in a stock (particularly to the downside) is quickly
credited to the actions of the MM's by investors on the internet. In
most cases, however, it is simply the forces of the market moving a stock,
not an organized action on the part of several market makers.
Traders who have access to Nasdaq Level II quotes can watch the actions
of the various market makers in real time. For more information on using
Level II, see the online tutorial at:
http://www.tradertutor.com/tutorial.htm
Modern trading includes not only the markets provided by the market makers,
but also trading on the ECNs (Electronic Communications Networks). ECN's
such as Instinet or Island make it even more difficult for a small number
of market makers to manipulate the short term price of a stock.
For more information on how the markets work, see the excellent online
tutorial offered at Ameritrade:
http://www.ameritrade.com/educationv2/fhtml/stockmarket/players.fhtml
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After-Hours Activity
A few stocks were moving in heavy volume after the close of trading
on Friday, primarily due to end of the quarter changes in some of the
stock indices such as the S&P 500. Other stocks were trading in response
to news, but trading was fairly light overall as traders hit the road
for the long weekend.
BVSN was the most heavily traded stock in the after hours on Friday trading
over 19 million shares. The company was dropped from the S&P500 and
lost over 14% during the trading day on Friday. In the after hours
session the stock was up about 2.3%
XL Capital (XL) was also trading on heavy volume in the after hours
session after the company announced that Moody's had assigned an Aa2
insurance financial strength rating to the company. Despite the heavy
volume, the stock was unchanged in the after hours session.
For traders looking for some sign of bullishness after a difficult
week of stock market declines there was ORCL and INTC. INTC was up about
0.72% on good volume in the after hours on Friday, while ORCL added a
little over 1%. JDSU and SUNW were also trading up slightly while
CIEN and CSCO were trading down less than 1%.
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Trading Outlook
Welcome to September!
While September has historically been a tough month for bulls on
Wall Street, traders were no doubt happy to see August end on Friday.
August of 2001 was a particularly difficult month for the US markets
as all 3 major market indices lost ground on erractic and volatile trading.
While most of August saw stocks moving lower, the markets did manage
to finish the final day of trading for the month on a mildy positive
note. The Nasdaq was up nearly 0.8% on Friday while the Dow added about
0.3%. The S%P 500 gained 0.4% on light volume.
Pessimism is currently quite strong in the markets. As I was watching
the weekend business shows, I was struck by the negative tone of most
of the market commentators. Indeed, TheStreet.com is running the following
headline this evening:
"The Coming Week: Optimism May Be Hard to Find on Wall Street"
This is a bullish sign. When pessimism begins to peak, the markets
are usually near a bottom. I'm starting to see some strong signs
that this may indeed be the case.
Many traders and investors are looking for a retest of the April lows.
I'm not so sure we'll get it, however. The Nasdaq composite has been
trading in a very well defined downtrending channel since the beginning
of May. So far, the bottom of the channel hasn't been broken. On
Thursday and Friday of last week, the Nasdaq tested the bottom of this
trading channel, but didn't break through it. This is a bullish sign,
in my opinion.
Bear market trading channels are difficult to find. The reason for this
is the tendency for stocks and indices to ACCELERATE TO THE DOWNSIDE
during bear markets. This type of activity looks like a downward curving
line, when plotted on a linear stock chart. THE FINAL DOWNLEG OF A BEAR
MARKET, HOWEVER, IS OFTEN CONFINED TO A WELL DEFINED LINEAR TRADING CHANNEL.
I believe we may be seeing that right now. The top of the current trading
channel is just above the 2000 level. It would not surprise me to see
the Nasdaq make a run at this level over the next few weeks.
What?? I must be mad, you're probably saying. What about all the bad news,
the layoffs, the earnings warnings, etc?? Indeed, the outlook for the
US economy is looking bleak. You must remember, however, that the
markets will TURN HIGHER BEFORE THE ECONOMIC PICTURE BEGINS TO BRIGHTEN.
I have often referenced the excellent work of Magee and Edwards in their
classic book, "Technical Analysis of Stock Trends". Here is what Magee
and Edwards say about bear market bottoms:
"The Bear Market ends when everything in the way of possible
bad news, the worst to be expected, has been discounted, and it
is usually over before all the bad news is "out"." (Technical
Analysis of Stock Trends, Magee and Edwards, Seventh Edition,
St. Lucie Press, Pg. 21-22)
Notice what Magee and Edwards say: ...IT IS USUALLY OVER BEFORE ALL THE
BAD NEWS IS "OUT". Not when all the bad news is out... Not AFTER all the
bad news it out, but BEFORE...
I believe the recent heavy selling of last week in the markets was in
anticipation of the earnings warning season which will likely begin this
week. In my opinion, the market has priced in a "worst case scenario".
Therefore, we could easily see the market begin to rally, as the bad news
comes out. Perhaps much of the bad news will be better than expected.
In any case, the markets and sentiment indicators are showing strongly
oversold conditions. Its not safe, in my opinion, to be opening new
short positions at this level. I'm fairly confident opening long trading
positions in stocks like ALSC (one of Tonights Picks) which are sitting
on strong multi-month support levels. The potential upside is significant,
while the support level allows us to maintain a tight stop. If the stock
moves to new lows, we simply sell for a small loss.
In any case, thats the view from here for now, where we're beginning to
see "light" at the end of the tunnel. Of course, there is the possibility
that I'm totally wrong. The market will show its hand soon enough. Its
always important to keep a tight stop loss, "just in case".
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